[ by Howard Haykin ]

The SEC on Wednesday charged a former $1 billion hedge fund advisory firm and 2 executives with scheming to overvalue AUM ("assets under management").  The overstatement exaggerated reported returns of hedge funds they managed - hiding losses and increasing their management fees.

The case was based on findings made by the SEC’s Aberrational Performance Inquiry.  [Click here for a BTN writeup about the SEC's API Unit.]

Profiles of Defendants and Relevant Entities. Yorkville Advisors, LLC, a Jersey City, NJ-based investment adviser that just registered with the SEC in June, has been an LLC since 2001. Yorkville acknowledged to investors that it was a fiduciary and owed fiduciary duties to the various funds that it managed.

Mark Angelo, 40, a resident of Westfield, NJ, is founder, president and majority owner of Yorkville and is the Portfolio Manager of the funds advised by Yorkville.  He's also a majority owner and managing member of Yorkville Advisors GP, LLC, the general partner of YA Global Investments, L.P. and YA Global Investments (U.S.), LP.  Angelo held Series 4, 7, 24, and 63 licenses prior to founding Yorkville. Yorkville's promotional documents identify Angelo as the "portfolio manager" of the Funds who is responsible for overseeing all aspects of the Funds'  day-to-day operations.

Edward Schinik, 47, a resident of Watchung, NJ, has served as Yorkville's CFO, COO, and as Chairman of its Valuation Committee since December 2005.  Schinik is a licensed CPA in New York.

Relevant Entities in the case are funds managed by Yorkville, namely:

• YA Global Investments (U.S.), LP ("YA US"), a Delaware LP formed 2/28/05.  Prior to July 2007, YA US was known as Cornell Capital Partners (U.S.), LP.
• YA Offshore Global Investments, Ltd. ("YA Offshore"), a Cayman Islands company incorporated in 2001. Prior to July 2007, YA Offshore was known as Cornell Capital Partners Offshore, Ltd.
• YA Global Investments, L.P. ("YA Global") a Cayman Islands LOP formed in 2001.  Prior to July 2007, YA Global was known as Cornell Capital Partners, L.P.
• YA Global is a master fund and YA US and YA Offshore are its feeder funds.
• Yorkville Advisors GP, LLC ("YA GP"), General Partner of  YA Global and YA US, is a Delaware LLC  and Angelo is the majority owner.

SEC Findings and Allegations. Yorkville Advisors, Mark Angelo, and Edward Schinik allegedly enticed pension funds and other investors to invest in their hedge funds by falsely portraying Yorkville as a firm that managed a highly-collateralized investment portfolio and employed a robust valuation procedure. They misrepresented the safety and liquidity of the investments made by the hedge funds, and charged excessive fees to the funds based on the fraudulently inflated values of the investments.

It's alleged that Yorkville and the two executives specifically:

• Failed to adhere to Yorkville’s stated valuation policies.
• Ignored negative information about certain investments by the funds.
• Withheld adverse information about fund investments from Yorkville’s auditor, which enabled Yorkville to carry some of its largest investments at inflated values.
• Misled investors about the liquidity of the funds, collateral underlying the investments, and Yorkville’s use of a third-party valuation firm.

By fraudulently making Yorkville’s funds more attractive to potential investors, Angelo and Schinik attracted more than $280 million in investments from pension funds and funds of funds, enabling Yorkville to collect excess fees - based on inflated valuations - of at least $10 million. 

Violations Charged and Agreed Upon Sanctions.   The defendants were charged with violating:

• Yorkville: Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  Also, Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.

• Mark Angelo: Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1), (2) and (4) of the Advisers Act and Rule 206(4)-8. Also, charged with 'aiding and abetting' Yorkville’s violations of the Exchange Act and Advisers Act.

• Edward Schinik is charged with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, and with aiding and abetting Yorkville’s violations of the Exchange Act and Advisers Act.

SEC Staff Credits.   Investigation by Stephen Holden, Brian Fitzpatrick, Kenneth Gottlieb, with the support from Frank Milewski, and supervised by Valerie Szczepanik, Ken Joseph. SEC litigation led by Todd Brody.

For further details, go to:  [SEC PR 12-209, 10/17/12], [SEC Complaint], and [Some Other SEC Cases in the Aberrational Performance Inquiry].